Do Local Governments Maximize Anything?

Abstract

In the recent empirical literature on local government expenditure determination, researchers have begun to apply the results of classical consumer theory to the public sector. In assuming that public expenditure can be specified in the form of an integrable demand function that is further restricted to satisfy separability, researchers can reduce the number of parameters (equations) to be estimated and interpret their results in terms of familiar price and income elasticities. It is not clear, however, that utility maximization and separability are valid assumptions in the context of the public sector. Based on an empirical test for a sample of 132 municipalities, we reject the hypothesis that unrestricted estimates are consistent with utility maximization and separability.